The Next Iron Age

July/August 2014

Thirteen years ago, U.S. direct-reduced iron production came crashing to a halt. Now it’s back, with up to 12 million mt of production capacity coming online by 2020. Is this revival a game-changer for the U.S. and global steel industries, and what does that mean for ferrous scrap?

By Kent Kiser

U.S. production of direct-reduced iron has had its ups and downs in the past 40 years, but the industry received a near-fatal blow in 2000, when U.S. natural gas costs spiked and scrap and finished steel prices plummeted. Production fell 92 percent in one year, from 1.56 million mt in 2000 to 120,000 mt in 2001, according to data from Midrex Technologies (Charlotte, N.C.). “Every consultant at the time said there would never be another direct-reduction plant built in the United States because its natural gas prices were never going to come down,” says Christopher Ravenscroft, marketing manager for Midrex.

The price of natural gas is a critical factor because making DRI is an energy-intensive process. It takes significant quantities of natural gas or coal to strip oxygen from iron oxide pellets or lump iron ore to turn it into metallic iron, or DRI. 2001 was the beginning of the end for U.S. DRI production, which essentially stopped altogether in 2009, according to Midrex’s reports. In other words, U.S. DRI was D.O.A.

At the same time the U.S. DRI industry was going bust, however, the natural gas industry was beginning to boom. Induced hydraulic fracturing, or fracking, expanded the U.S. supply of natural gas—and lowered its price—beginning around 2009. That sea change, combined with healthier scrap and finished steel prices, have brought domestic DRI production back to life.

An Industry’s Death and Rebirth

The recent history of the U.S. DRI industry is captured in the story of one production facility in Convent, La. American Iron Reduction constructed the facility on the Mississippi River and began producing DRI there in January 1998, when the monthly average U.S. natural gas price was $2.09 per million Btu, No. 1 heavy melting steel scrap was about $133 a gross ton, and hot-rolled coil steel was $320 a ton.

The timing of the launch could hardly have been worse, however, as natural gas prices almost immediately started to climb and scrap and steel prices started to fall, creating a “perfect storm” that devastated U.S. DRI production, says Robert Hunter, DRI product and applications manager for Midrex. In August 1999, U.S. natural gas prices spiked to $2.80, up 34 percent from January 1998. In September, No. 1 HMS prices were down 28 percent and hot-rolled coil prices were down 8 percent from January 1998. The higher gas prices raised DRI production costs at the same time scrap became cheaper and more attractive to mills facing lower prices for their products. In September 1999, less than two years after it started operating, AIR idled the Convent plant.

The worst was yet to come, however. The U.S. natural gas price peaked at $8.90 in December 2000, and No. 1 HMS and hot-rolled coil tags both reached their nadir in November 2001, at $64.67 and $213, respectively. Those prices sealed AIR’s fate and hurt the two other U.S. DRI facilities—one at Georgetown Steel (Georgetown, S.C.) and the other in Mobile, Ala., owned by the Corus Group (London). “The significant rise in natural gas prices as well as dramatic drops in the price of steel scrap basically brought about the closure of the U.S. and Canadian DRI industries,” says Joel Morales, marketing manager for Tenova HYL (Monterrey, Mexico).

Nucor Corp. (Charlotte, N.C.), an electric-arc furnace steelmaker, purchased AIR’s assets in 2004. In 2005, it relocated the DRI production modules to Point Lisas, Trinidad, to take advantage of the island’s “low-cost supply of natural gas and favorable logistics for receipt of Brazilian iron ore and shipment of DRI to the U.S.,” the company said in a press release. The Point Lisas operation, named Nu-Iron, came online in December 2005 with the capacity to produce 1.6 million mt a year. That month, U.S. natural gas prices spiked to $13.05.

Iron Dynamics (Butler, Ind.), a captive DRI operation for EAF steelmaker Steel Dynamics (Fort Wayne, Ind.), was the last U.S. DRI producer operating in the 2000s. It produced an average of about 240,000 mt a year from 2005 to 2008, then it started using steel mill wastes along with iron ore in its production mix, which disqualified it from Midrex’s survey. DRI production in the United States stopped entirely in 2009, Midrex reports, and it remained at zero through 2013.

The U.S. natural gas market started changing dramatically in 2009, however. After setting a record annual average of $8.86 in 2008, U.S. gas prices dropped 56 percent in 2009, to $3.94, and took another dip, to $2.75, in 2012—the first annual average below $3 since 1999. No. 1 HMS scrap prices and hot-rolled coil prices also began gaining momentum in 2009, with the former setting a record annual average of $412.17 a gross ton in 2011 and the latter hitting its peak of $747 a ton in 2011. Those price dynamics, along with what industry observers call unreliable, low-quality supplies of DRI from Venezuela, made DRI production in the United States an attractive, viable proposition once again.

One more factor influencing DRI production is the recent and projected growth of EAF steelmaking. From 2001 to 2012, global EAF production grew 58 percent, from 285 million mt to 450 million mt. About 30 percent of global crude steel now comes from EAF facilities, according to data from the World Steel Association (Brussels). With world steel production projected to exceed 2 billion mt by 2030, “you’ll need to double the amount of global DRI production—to at least 150 million mt—just to fill the greater demand from EAF producers,” says Stuart Horner, secretary general of the International Iron Metallics Association (Sheffield, England). “There will be a huge demand for additional DRI supplies just to remain even with the projected growth of EAF steelmaking.”

Recognizing those market factors, Nucor decided to install a new DRI production facility at a different site in Convent, about 30 miles from the original AIR plant. It broke ground on the $750 million project—now named Nucor Steel Louisiana—in early 2011, and the plant began operating in December 2013 with a designed production capacity of 2.5 million mt a year.

“What has made a huge difference” in the prospects for this and other new DRI projects “is the ability to lock in gas prices over a considerable time period,” Horner says. In fact, Nucor signed a 20-year agreement for natural gas supplies to the Louisiana operation.

With its captive DRI operations in Louisiana and Trinidad, Nucor now has more raw material options to control both costs and quality. “There are a lot of tramp elements—such as copper—in scrap used in EAFs,” Midrex’s Hunter explains. “To dilute those elements to a level that allows EAFs to make certain products, they need to use pure metallics such as DRI, HBI, or pig iron. With virgin iron, an EAF can make any steel that a blast furnace can make and compete successfully” against integrated mills on value-added steel products such as automotive sheet.

Further Growth

Nucor’s Convent operation is the first sign of the revival of U.S. DRI production, but one other project is close on its heels and several others are in the planning stages. This April, integrated steel producer voestalpine Group (Linz, Austria) broke ground on a 500-acre operation that will have the annual capacity to produce 2 million mt of HBI, or hot-briquetted iron, which is the compacted form of DRI. The $740 million voestalpine Texas facility in Portland, Texas, is on Corpus Christi Bay, which feeds into the Gulf of Mexico. The company plans to ship half of the plant’s output to its blast-furnace steel mills in Linz and Donawitz, Austria, and sell the other half to companies such as Altos Hornos de Mexico (Monclova, Mexico) under long-term contracts.

This new plant, slated to start production in early 2016 with 150 employees, is a “game-changer and marks a new way of thinking for the industry,” Midrex’s Ravenscroft says. Unlike Nucor, voestalpine isn’t establishing U.S. DRI capacity to feed U.S.-based steelmaking operations. Instead, it’s the first to capitalize on the low cost of U.S. natural gas—which is reportedly one-third to one-quarter the cost of natural gas in Europe—to produce high-quality iron in Europe at a lower cost. Using HBI as a substitute for iron ore in its integrated mills will “substantially reduce” its production costs, voestalpine says, because it will yield greater production of hot metal in the first stage of the steelmaking process.

The Texas plant also will help voestalpine meet Europe’s environmental sustainability demands. Traditionally, integrated mills reduce iron ore to metallic iron using purified coal (coke) in blast furnaces, but that generates significant amounts of carbon dioxide—a greenhouse gas—and pollutants. “Using natural gas instead of coke in the reduction process plays an important part in improving the CO2 balance and is a fundamental step in achieving our own extremely challenging internal energy and climate goals,” the company says in a press release.

The Nucor and voestalpine projects “represent two very specific strategies,” Ravenscroft says. In other words, companies considering DRI production in the United States might be “looking at it for different reasons.”

International Metallics Corp. (Reston, Va.), a project development firm backed by unnamed European private investors, and IMC Holdings, its Wisconsin-based subsidiary, are exploring the construction of an $800 million HBI plant in Superior, Wis. The 135.5-acre plant, which would have a designed capacity of 2.5 million mt and about 100 employees, would sell its product to mill customers, initially in the United States. This project is in the development phase, which consists of preliminary engineering work as well as commercial and environmental analyses to assess the feasibility of the site for the proposed operation. The facility would make HBI using iron ore pellets from Minnesota’s Iron Range and natural gas from North Dakota. The companies expect to complete the project evaluation phase by the end of the year. The facility “is projected to be operational by 2017 yet is contingent upon a variety of environmental and construction timelines,” a company spokesperson says.

North Star BlueScope Steel (Delta, Ohio)—a 50/50 joint venture of Cargill (Minnetonka, Minn.) and BlueScope Steel (Melbourne, Australia)—is considering a $300 million investment in a DRI plant, according to news reports. In the same vein, Republic Steel (Canton, Ohio) and U.S. Steel Corp. (Pittsburgh) are considering their own $300 million DRI plant joint venture. According to news reports and comments from U.S. Steel investor conference calls, the facility would make DRI from iron ore pellets from U.S. Steel’s Minnesota mining operations. Republic would use the DRI to make steel rounds at its Lorain, Ohio, mill, and U.S. Steel would use those rounds in its adjacent mill to produce seamless steel pipe.

Whether or not those three operations come to fruition, “we see two to three more plants being built in the United States by the end of the decade,” Ravenscroft says. And DRI market watchers are confident U.S. production will continue to grow. The Nucor and voestalpine operations together will give the United States 4.5 million mt of rated DRI/HBI production capacity, and analysts project another 3.5 million to 7.5 million mt of capacity could come online by 2020, boosting annual U.S. DRI output to 8 million to 12 million mt a year. Nucor also reportedly holds permits to expand its Convent operation from its current 2.5 million mt to 5.5 million mt of capacity. “All things considered, there is room for significant growth in U.S. DRI production,” Tenova HYL’s Morales says. “There is also a confidence level that, once the current projects take hold, they could inspire new projects and further growth of the industry.”

Future Growth, Future Worries

What will determine whether the predicted growth in U.S. DRI production will become a reality? First and foremost, U.S. natural gas supplies must continue to expand and be available at attractive prices. In its 2012 statistical report, Midrex says it expects that supply growth “at a more rapid rate than in previous years,” pointing out that “the technology for shale gas production has radically altered the supply/demand picture in North America, and this technology is quickly expanding worldwide.”

Second is growth in DRI and HBI demand. More U.S. EAF steel producers must view DRI/HBI as a key to better managing the residual elements in their ferrous scrap and making higher-value steel products to compete with integrated mills. Driving this demand, Horner says, is the type of steel EAF producers want to make. “How far up the value chain do they want to go?” he asks. “They can’t make deep-drawing sheet from scrap alone, not even with the best-quality scrap that’s available. So they have to use more direct-reduction products and pig iron to achieve the low levels of residuals [high-value] products require.”

Alternatively, demand could grow because more integrated mills begin using U.S.-produced DRI/HBI to increase productivity, lower blast-furnace fuel consumption, lower coke consumption, and decrease CO2 emissions. “The movement to monetize a penalty for CO2 generation is gathering momentum and within the next decade or so is expected to have a worldwide effect as more integrated mills will begin to use HBI,” Midrex says in its 2012 report. Ravenscroft sees the recent decision by the U.S. Environmental Protection Agency (Washington, D.C.) to reduce emissions from U.S. coal-fired power plants as a potential warning sign for U.S. steelmakers. “The power industry might be front and center in the spotlight now,” he says, but “integrated mills are the largest generator of CO2 emissions in the steel sector.” DRI/HBI could help the blast-furnace industry improve its efficiency and reduce its emissions, but “none of that comes into play until there are penalties or government enforcement,” Ravenscroft says. (EAFs already have an emissions advantage: They can produce steel with about one-third to one-half the CO2 emissions of blast-furnace steelmaking.)

As the sector’s up-and-down past indicates, however, certain factors could cause the market to stall. According to Ravenscroft, the market would have to face another “perfect storm” of higher gas prices, lower scrap and finished steel prices, and tight financing for new DRI projects. “You’d need to have several [negative] factors all at once, but even that would only slow the market, not crush it,” he says.

One development that could shake the market, however, is if the EPA imposes restrictions on fracking. “Just as shale gas has brought about this revival, interruptions to this type of exploration could easily stop current growth,” Morales says. As Horner puts it, “there are environmental issues related to shale gas production that could create bumps in the road later.” If the U.S. government does limit fracking, “that would affect more than just the steel and metallics industries,” Ravenscroft says. “It would mean the United States wouldn’t be able to compete in a variety of industries.”

Another concern is whether there is sufficient supply of the type of iron ore needed to make direct-reduction products, Horner says. “The ore needs a particular level of available iron and low levels of various other elements. It’s an issue.”

And, finally, U.S. DRI growth could slow if the economy does. “A prolonged industrial decline or financial breakdown that would affect all industries in general would, of course, affect the current growth in the DRI industry,” Morales says, though he adds quickly that Tenova HYL sees “no indications at this point that this will occur.”

For recyclers, the big question is whether growing U.S. DRI production will affect the scrap market. Midrex’s Hunter says higher DRI supplies could lower the premium on low-volume, high-quality prime scrap but would have no effect on the large-volume, obsolete scrap grades. “You’re not going to move those,” he says. “That’s just too big a field for DRI to influence.” John Harris, CEO of Aaristic Services (Innisfil, Ontario), a metallics consulting firm, adds that greater U.S. DRI supplies “will have some influence on the price differential between prime scrap and shredded.” In general, though, “it’s not an issue for recyclers,” he says. “They just need to be aware of it.”

Offering a recycler’s perspective, however, Jim Wiseman, a partner in Smart Recycling Management (Louisville, Ky.), sees cause for worry ahead. “Scrap is still going to get recycled—DRI is not going to change that—but I think it’s going to affect pricing and demand for scrap,” he says. For years, he notes, DRI production in the United States was “something looming on the horizon,” but now it’s in the foreground—and given the U.S. projects that are online or in the works, it’s a reality that’s here to stay. 

DRI Production in Canada and Mexico

Though the United States stopped producing DRI from 2009 to 2013, its North American neighbors did not. In 2013, Mexico produced 6.13 million mt and Canada produced 1.25 million mt of DRI, according to data from Midrex Technologies (Charlotte, N.C.). Production facilities in each country are noted below, with their location, designed production capacity, and type of product.

CANADA
ArcelorMittal Montréal 1 (Contrecoeur, Québec)—400,000 mt, DRI
ArcelorMittal Montréal 2 (Contrecoeur, Québec)—600,000 mt, DRI

MEXICO
ArcelorMittal Lázaro Cárdenas (Lázaro Cárdenas)—1.2 million mt, DRI
ArcelorMittal Lázaro Cárdenas (Lázaro Cárdenas)—1 million mt, DRI
ArcelorMittal Lázaro Cárdenas (Lázaro Cárdenas)—1 million mt, DRI
Ternium 2PS (Puebla)—610,000 mt, DRI
Ternium 3MS (Monterrey)—500,000 mt, DRI
Ternium 4M (Monterrey)—680,000 mt, hot DRI

Source: Midrex Technologies

Thirteen years ago, U.S. direct-reduced iron production came crashing to a halt. Now it’s back, with up to 12 million mt of production capacity coming online by 2020. Is this revival a game-changer for the U.S. and global steel industries, and what does that mean for ferrous scrap?